(Bloomberg) — As volatility hits even the strongest emerging market economies, one nation is turning into a safe haven and investors’ choice to hide from the Federal Reserve’s tightening frenzy: Brazil.

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Stocks, bonds and currencies in developing countries are experiencing their worst slump in decades, but you wouldn’t know that by looking at the Latin American country’s assets. Traders are reaping double-digit carry yields from its currency, making the most bullish bond bets in 13 years, sparing its local-currency debt from a high-yield selloff and calling its stocks “the hottest trade in the world.” town”.

The outperformance brings much-needed relief to emerging market investors who have been stung: in China, where growth is collapsing; India, where high oil prices cripple the currency; Africa, where debt crises are brewing; and Eastern Europe, which has been shaken by the fall of the euro.

Brazil is seen by many as the only major developing country with an economic formula – double-digit benchmark interest rates coupled with a giant commodity-exporting industry – that can withstand the financial strain created by the soaring global yields. And then there’s the presidential election next weekend. Optimism is now growing that, whoever wins, the next government will pursue pro-market policies.

“Brazil is really kind of an unexpected haven as we approach the election,” said Viktor Szabo, chief investment officer at abrdn in London. “It’s been a pretty tough year for emerging markets as a whole, with inflation, a war in Ukraine and central bank tightening. But Brazil stands out and is a strong investment story on both financial markets and in the real economy.

At the heart of this story is Brazil’s dogged pursuit of monetary tightening to contain inflation. While many emerging market central banks have proactively raised interest rates to prepare for Fed tightening, few have been as aggressive as Banco Central do Brasil. Its benchmark rate is now almost seven times higher than it was 19 months ago.

The ploy worked. Brazil became the first developing country to report a spike in inflation, seeing consumer price growth ease for three straight months, with further help from fuel tax cuts and other products. The country’s real policy rate rose globally by 6.58%. This shifts the interest rate debate from hikes to a potential cut next year.

Traders bet Brazil’s Hawkish central bank will change tack

This is a position to be envied by other emerging markets. Average inflation in the group is at its highest in a decade, with double-digit price growth and negative real yields hitting most countries.

Benchmark emerging market local currency bonds are heading for the worst annual losses since at least 2009, dollar bonds for the biggest drop since 1994. Equities are seeing the biggest selloff since the 2008 financial crisis.

In contrast, Brazil is offering investors the best local currency bond yields this month and is also the only high-yield country to post a gain. In dollar bonds, the sovereign risk premium over Treasuries has fallen 100 basis points since July, bringing it to its lowest level since the financial crisis compared to other emerging markets. Its stocks generate the fifth best dollar returns in the world.

Carry yields on the real rise this month to the highest since May, taking year-to-date yields to 16%. Given that other emerging markets produced carry losses of 6%, traders who moved to Brazil are better off by 22 percentage points in 2022.

“There’s really nowhere else in the world that looks like this,” said Ayman Ahmed, fund manager at Thornburg Investment Management, referring to Brazil’s monetary tightening that led to the carry. “They are so far ahead of the curve that the country has become an investor darling.”

The presidential elections in Brazil are arguably the most watched political event in emerging markets today. The battle between President Jair Bolsonaro and former left-wing leader Luiz Inacio Lula da Silva proved closer than expected and went to a runoff on October 30. While Lula is still the poll favorite, Bolsonaro is winning over him.

Investors believe that either market-friendly Bolsonaro will win or Lula will prevail in a tight race that will encourage him to pursue more fiscally responsible policies. Both results are considered positive for post-election risk, although political constraints to increase social spending may return in the medium term. The only scenario that could ruin the market party is a contested outcome.

“The final vote remains a key test of Brazilian institutional strength,” said Robert Hoodless, head of foreign exchange and macro analysis for Europe and the Americas at InTouch Capital Markets. “Until we get to such a bad result, Brazil looks set to remain a go-to for most emerging market players.”

Foreign investors cut their bearish bets on the Brazilian real by about $5 billion after the first round of the election, according to B3 local exchange data compiled by Bloomberg. During the week ended October 21, the country attracted the largest inflow among emerging market exchange-traded funds.

Fiscal risks

The specter of a poor outcome – not just in elections, but in fiscal discipline and long-term political stability – always hangs in the air when fund managers talk about Brazil. This is where the knot lies. A lot could go wrong quickly in this volatile emerging nation and that prevents investors from going bullish beyond a horizon of a few months.

“Regardless of a Lula or Bolsonaro victory, fiscal policy is likely to turn expansionary,” said Brendan McKenna, strategist at Wells Fargo in New York. “Brazil already has limited fiscal space; so if public finances deteriorate further in the coming years and spending limits are ignored, Brazilian assets could reverse course.

But for now, the immediate priority for investors is to survive dwindling liquidity and the Fed’s relentless trajectory to higher rates. Most expect at least six months of volatility and need a safe haven to park and preserve their capital. Brazil responds to this need.

“The country is in pretty good shape,” said Daniel Tenengauzer, chief market strategist at Bank of New York Mellon Corp. “So that’s basically my bias: to go long almost regardless of the outcome.”

What to watch this week:

  • A sense of exasperation swept through Chinese markets on Monday as President Xi Jinping moved to pile his leadership ranks with loyalists, with stocks capping their worst day in Hong Kong since the 2008 global financial crisis and the yuan s weakening to a 14-year low.

    • A series of key economic data from China – released on Monday after sharp delays last week – showed a mixed recovery. The economy grew faster than expected in the third quarter as industrial activity improved despite Covid restrictions and a housing slump, but retail sales weakened

  • Colombia will likely raise its benchmark rate to 11% to curb the surge in consumer prices. Policymakers have raised interest rates by more than eight percentage points since September 2021

  • Russia is on course to keep interest rates on hold after cutting borrowing costs in previous meetings as the urgency to revive the economy gives way to concerns about high consumer prices

–With help from Maria Elena Vizcaino, Aline Oyamada, Davison Santana and Colleen Goko.

(Adds details on ETF entries in the 16th paragraph, Chinese markets and economic data in the first point)

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